WEEK 1- DAY 1

Q. What are the forms of entities to carry out business in India?

Research Questions:

1. What the forms of business organisations?

Business may be defined as an economic activity that involves the exchange,

purchase, sale or production of goods and services with a motive to earn profits and
satisfy customers' needs. Business organisation, however, is defined as an entity
which is structured for the purpose of carrying on the commercial system of
enterprise. It is the structured arrangement of individuals, resources, and activities
orchestrated to achieve specific commercial objectives. It is the framework within
which business activities are planned, coordinated, and executed.

The classification of business organisations can be discussed as under:

a) Sole Proprietorship:
A popular form of business organization in which the business is owned,
managed, and controlled by an individual is known as a sole proprietorship.
This individual is the recipient of every profit and loss of the business and
bears every risk coming to the business. Here, the word sole means only and
proprietor means owner; hence, the only owner of the business.

The features of Sole Proprietorship includes:

 Ownership: Sole proprietorships are businesses owned and operated by a

single individual. The owner assumes all responsibilities and liabilities.
 Easy Setup: They are the simplest form of business to establish, requiring
minimal legal formalities and paperwork.
 Profit Retention: The owner retains all profits generated by the business.
 Unlimited Liability: The owner has unlimited personal liability for
business debts and obligations, risking personal assets.
 Taxation: Profits are taxed as the personal income of the owner.

Advantages
 Full Control: The owner maintains complete control over business
operations and decisions.
 Ease of Decision-Making: Quick decision-making due to a lack of
hierarchical structure.
  Tax Benefits: Potential tax advantages as business losses can offset
personal income.
 Flexibility: Easy to start, manage, and dissolve as per the owner's
discretion.

Disadvantages
 Unlimited Liability: The owner is liable for debts, lawsuits, and business
obligations, risking personal assets.
 Limited Capital: Difficulty in raising substantial capital compared to larger
business structures.
 Limited Expertise: Sole proprietors may lack expertise in various business
aspects, impacting growth potential.
 Continuity: Business continuity may be uncertain due to its dependence on
the owner's lifespan and health.

b) Partnership:
The most crucial disadvantage of a sole proprietorship is the lack of enough
financing in the business, which is resolved in this form of business
organization. According to the Indian Partnership Act, 1932, a partnership is a
form of business organization in which there is a relation between two or more
people with an agreement to share the firm’s profits carried on by every
partner or any one of the partners acting for all. It solves the need to acquire
greater capital investment, risk-sharing, and a variety of skills in the business,
which is not available in Sole Proprietorship and Joint Hindu Family Business.
The minimum number of partners required in a partnership firm is two. There
are different types of partners and partnerships in this form of business
organization.

Features:
 Ownership: Partnerships involve two or more individuals sharing
ownership, responsibilities, and profits.
 Types: General partnerships (GP) involve equal management and liability
sharing, while limited partnerships (LP) offer limited liability to some
partners.
 Agreement: Partnerships operate based on a partnership agreement
detailing roles, responsibilities, profit-sharing, and decision-making.
 Taxation: Profits are passed through to partners' personal income tax.

Advantages:
 Shared Responsibility: Partnerships benefit from shared responsibilities, skills,
and expertise among partners.
 Complementary Skills: Partners can bring the business diverse skills,
knowledge, and resources.
 Capital Access: Easier access to capital due to contributions from multiple
partners.
 Tax Benefits: Profits are taxed as personal income, offering tax flexibility.
Disadvantages:
 Unlimited Liability (in General Partnerships): Partners share unlimited
liability for business debts and obligations.
 Conflict Risks: Disagreements and conflicts among partners can affect
decision-making and business operations.
 Shared Profits: Profits are divided among partners based on the partnership
agreement, potentially leading to disputes.
 Limited Life Span: The business's continuity may be affected by a partner's
withdrawal, death, or bankruptcy.

c) Limited Liability partnership:

This form of business organization is operated by organizations facing

troubles of several liabilities in the business. LLP or Limited Liability
Partnerships enable partners to hold separate obligations in business. Here, the
partners continue to share the profits, just like a regular partnership firm. But
unlike regular firms, the partners in LLP can choose the profit-sharing ratio by
themselves. In this form of business organization, the minimum number of
partners has to be two.

Features:
 Ownership: LLCs blend features of partnerships and corporations, offering
limited liability to owners (members) while maintaining pass-through
taxation.
 Limited Liability: Members have limited liability, protecting personal
assets from business debts and obligations.
 Flexible Structure: LLCs have flexible management structure and profit
distribution among members.
 Taxation: Profits pass through to members' personal income tax returns.
Advantages:
 Limited Liability: Members are shielded from personal liability for
business debts and lawsuits.
  Tax Flexibility: LLCs can choose taxation as a sole proprietorship,
partnership, S corporation, or C corporation.
 Flexible Management: Less stringent management requirements, offering
operational flexibility.
 Pass-Through Taxation: Avoids double taxation; profits are taxed only at
the individual level.
Disadvantages:
 Complexity: An LLC may involve more paperwork and formalities than
sole proprietorships or partnerships.
 State Laws: Compliance with state-specific regulations and requirements.
 Investor Restrictions: May face limitations in attracting investors due to
ownership and management structures.
 Perpetual Succession Uncertainty: LLCs' continuity may be uncertain due
to member changes or dissolution.

d) Joint Stock Company:

An association of different individuals formed to carry out business activities

is known as a joint stock company. This form of organization has an
independent legal status from its members. Basically, a joint stock company is
an artificial individual with a separate legal entity, common seal and perpetual
succession. The Joint Stock Company form of organization is governed by the
Companies Act, 2013. The shareholders of the company are its owners;
however, the Board of Directors is elected by the shareholders and is the chief
managing body of the company. Usually, the shareholders or the owners of the
company have indirect control over its operations. A company can be either
private or a public company.

Features:
 Ownership: Corporations are legal entities separate from their owners
(shareholders), providing limited liability to shareholders.
 Structure: They have a complex management structure involving
shareholders, directors, and officers.
 Limited Liability: Shareholders have limited liability, protecting personal
assets from business debts and obligations.
 Taxation: Corporations face double taxation (profits taxed at the corporate
level and dividends taxed at the individual shareholder level).
Advantages:
 Limited Liability: Shareholders' personal assets are protected from business
liabilities.
 Capital Raising: Easier access to capital by selling stocks and attracting
investors.
 Perpetual Existence: Continuity unaffected by changes in ownership or
management.
 Credibility: Corporations may have increased credibility and prestige.
Disadvantages:
  Double Taxation: Corporations face taxation at both corporate and
individual levels, resulting in potential double taxation of profits.
 Complexity and Formalities: Compliance with legal formalities, extensive
paperwork, and regulatory requirements.
 Costs: Higher costs associated with formation, compliance, and operational
expenses.
 Lack of Control: Shareholders may have limited control due to the
separation between ownership and management.

e) Cooperative Societies:

A voluntary association of people joining together with the main objective of

members’ welfare is known as a cooperative society. As the name suggests,
people in this form of business organization work together and with other
people for the accomplishment of a common purpose. The power to make
decisions in a Cooperative Society is in the hands of an elected managing
committee. The Cooperative Societies Act, of 1912 states that it is compulsory
to register a Cooperative Society.

Features:
 Ownership: Cooperatives are owned and democratically operated by their
members, who share profits and benefits.
 Membership: Members can be customers, employees, or producers with
shared goals and needs.
 Democratic Control: One member, one vote principle for decision-making
and governance.
 Profit Distribution: Profits are shared among members or reinvested in the
cooperative.
Advantages:
 Shared Benefits: Members benefit from shared profits, services, or
resources.
 Democratic Structure: Members have an equal say in decision-making
regardless of investment or ownership.
 Risk Sharing: Members share risks and responsibilities, fostering
community and support.
 Stability: Cooperatives may provide stability by catering to members' needs
and local communities.
Disadvantages:
 Decision-Making Challenges: Democratic decision-making processes can be
time-consuming and may lead to conflicts or inefficiencies.
 Capital Limitation: Limited access to capital due to members' contributions
and potentially fewer external funding sources.
 Limited Growth: May face challenges in scaling operations due to the
cooperative structure and shared governance.
  Potential Inequality: Disparities in contributions or participation among
members could lead to conflicts or dissatisfaction.

2. Which is the best suitable and accepted form of entities to do business or profession?

In the dynamic landscape of organizational structures, each form presents a unique blend
of advantages and limitations. Whether it’s the classic hierarchy, a nimble matrix, or the
agile network, discerning the optimal fit hinges on a comprehensive analysis. Factors
such as capitalization needs, business context, and anticipated returns play pivotal roles in
this strategic calculus.

The various forms of business organisations are subjects to their respective pros and cons.
While one form of organizational structure may seem better than the other, the same
comes with their respective drawbacks. Supposedly, the best suitable form of
organizational structure can be determined by analysing the various aspects and
expectations of and from conducting a business, inclusive of the remote factors like
capital requirements, nature of the business, profit margins etc.

3. What are the advantages of one over the other?

Each structure has its own unique features, and understanding these can help you make an
informed choice for your business:
1. Sole Proprietorship:
o Advantages:
 Cost-Effective: Setting up a sole proprietorship is straightforward and
usually involves minimal expenses.
 Direct Decision-Making: The owner has full control over business
decisions.
 Tax Simplicity: Income from the business is typically reported on the
owner’s personal tax return.
o Considerations:
 Unlimited Liability: The owner is personally liable for business debts
and obligations.
 Limited Resources: Sole proprietors may face limitations in terms of
capital and expertise.
2. General Partnership:
o Advantages:
 Shared Responsibility: Partners pool resources, skills, and expertise.
 Ease of Formation: Partnerships can be established informally, often
with a simple agreement.
 Tax Flexibility: Partners report income on their individual tax returns.
 o Considerations:
 Unlimited Liability: Like sole proprietors, partners are personally
liable.
 Potential Disputes: Disagreements among partners can arise.
 Dependency on Partners: Decisions require consensus.
3. Limited Liability Company (LLC):
o Advantages:
 Limited Liability: Owners’ personal assets are protected.
 Flexible Taxation: LLCs can choose to be taxed as a sole
proprietorship, partnership, or corporation.
 Simplified Formalities: Fewer administrative requirements compared
to corporations.
o Considerations:
 Operating Agreement: An LLC should have a well-defined operating
agreement.
 State-Specific Rules: Regulations vary by state.
4. Corporation:
o Advantages:
 Limited Liability: Shareholders’ personal assets are separate from the
company’s.
 Access to Capital: Corporations can issue stock and attract investors.
 Perpetual Existence: Corporations continue even if ownership changes.
o Considerations:
 Complexity: Corporations have formal structures, including boards of
directors.
 Double Taxation: C-Corporations face taxation at both corporate and
individual levels.
 Regulatory Compliance: Corporations must adhere to legal
requirements.
5. Limited Liability Partnership (LLP):
o Advantages:
 Liability Protection: Partners have limited personal liability.
 Professional Services: Common among professionals (e.g., lawyers,
accountants).
 Flexibility: LLPs combine features of partnerships and corporations.
o Considerations:
 State-Specific Rules: LLP regulations vary by state.
 Complex Formation: LLPs require formal registration.
6. S-Corporation:
o Advantages:
 Limited Liability: Shareholders’ personal assets are protected.
 Pass-Through Taxation: Profits and losses flow through to
shareholders’ personal tax returns.
 Ownership Flexibility: S-Corps can have up to 100 shareholders.
o Considerations:
  Eligibility Criteria: S-Corps have restrictions on ownership and
structure.
 Formalities: S-Corps must follow specific rules to maintain their status.
 Limited Growth Potential: S-Corps cannot issue publicly traded stock.

4. How is a company different from other social organisations?

In the realm of organizational structures, companies and social organizations stand as two
distinct archetypes, each with its unique mission and modus operandi.
The differences between a company and other social organisations can be understood by:
1. Nonprofit Organizations: Nonprofits operate for the betterment of the public and the
community at large. Their primary goal is to serve the public good and advance their mission.
Unlike for-profit companies, nonprofits do not aim to generate profits for owners. Instead,
they rely on donations, grants, and memberships as their main sources of revenue. Nonprofits
are typically tax-exempt entities, holding 501(3) status granted by the Internal Revenue
Service (IRS). This means they don’t pay federal income taxes on the donations and revenue
they receive. Well-known nonprofits address social, environmental, and humanitarian issues
globally. They are often run by volunteers and include organizations focused on education,
healthcare, and environmental conservation.
2. Social Enterprises: Social enterprises are businesses formed to fulfill a business purpose
while solving societal needs through commercial activities. Unlike traditional companies,
social enterprises prioritize positive impact over maximal profits. They aim to contribute to
society and the greater public. Examples of social enterprises can take various forms,
including charity organizations, mutual organizations, or cooperatives. Their focus ranges
from environmental sustainability to community development.
3. Companies (Businesses): For-profit companies exist primarily to generate profits for their
owners or shareholders. Unlike nonprofits, businesses can benefit the personal financial
interests of individuals, shareholders, or groups. They have assets, earn revenue, and pay
employees, just like nonprofits. However, their primary goal is financial success. Examples
of for-profit companies include traditional corporations, small businesses, and startups.

5. What are Financial Services Organisations?

The economy is made up of many different segments called sectors. These sectors are
comprised of different businesses that provide goods and services to consumers. The
variety of services offered by lending institutions, brokerage firms, and other businesses
are collectively referred to as the financial services sector.

The financial services sector is comprised of banking, mortgages, credit cards, payment
services, tax preparation and planning, accounting, and investing. Financial services are
often limited to the activity of firms and professionals, while financial products are the
financial instruments these professionals provide to their clients.
6. What are the key features of various structures and issues in choosing between business
structures including identification of location,tax implications etc?

1. Sole Proprietorship:
o Key Features:
 Ownership: Owned and operated by a single individual.
 Liability: Unlimited personal liability; the owner is personally
responsible for debts and obligations.
 Tax Implications: Business income is reported on the owner’s personal
tax return (Schedule C).
 Location: No specific location requirements.
o Considerations:
 Simplicity: Easy to set up and manage.
 Risk: High personal risk due to unlimited liability.
2. Partnership:
o Key Features:
 Ownership: Two or more partners share ownership.
 Liability: Partners share liability.
 Tax Implications: Partnerships file an informational return (Form
1065), but profits and losses flow through to partners’ personal tax
returns.
 Location: No specific location requirements.
o Considerations:
 Shared Decision-Making: Partners collaborate on business decisions.
 Partnership Agreement: Essential to define roles, responsibilities, and
profit-sharing.
3. Limited Liability Company (LLC):
o Key Features:
 Ownership: Members (owners) have limited liability.
 Liability: Members’ personal assets are protected.
 Tax Implications: LLCs can choose to be taxed as a sole
proprietorship, partnership, or corporation.
 Location: Flexible; can operate in any state.
o Considerations:
 Operating Agreement: Recommended to outline management and
ownership details.
 Pass-Through Taxation: LLCs avoid double taxation.
4. Corporation:
o Key Features:
 Ownership: Shareholders own the corporation.
 Liability: Shareholders’ personal assets are separate from the
company’s.
 Tax Implications: C-Corporations face double taxation (corporate and
individual levels); S-Corporations have pass-through taxation.
 Location: Can operate nationally or internationally.
 o Considerations:
 Formal Structure: Requires a board of directors, officers, and annual
meetings.
 Stock Issuance: Corporations can issue publicly traded stock.
5. Nonprofit Organization:
o Key Features:
 Purpose: Operates for the public good, not for profit.
 Liability: Limited liability for directors and officers.
 Tax Implications: Tax-exempt status (501©(3)) for qualifying
nonprofits.
 Location: No specific location requirements.
o Considerations:
 Mission-Driven: Focuses on social impact.
 Compliance: Must adhere to nonprofit regulations.
6. Location Considerations:
o Local Laws: Different states have varying regulations and tax laws.
o Market Access: Consider proximity to customers, suppliers, and partners.
o Cost of Doing Business: Evaluate costs related to rent, labour, and utilities.